Beware the new housing boom

The Wall Street Journal had an interesting story Thursday about signs of life in the housing market, applauding the good news that “the very long housing recession is finally over, and that prices in most of the country are rising again.” Foreclosure backlog is clearing up, while sparse new construction over the last few years makes older homes an attractive purchase.

But the Journal warns there is also “a less desirable side to this new boom”:

It is fueled by the same kind of government super-subsidy for housing that drove the boom and bust a decade ago. Through Fannie, Freddie and the Federal Housing Administration (FHA), the feds now underwrite some 90% of all mortgages.

Meanwhile, the Fed’s rock-bottom interest rates and its QE policies are both intended to reflate the housing market. The Fed is buying $40 billion a month in mortgage securities, despite the housing rebound, plus an additional $45 billion in long-term Treasurys to keep mortgage rates low. This makes it cheaper for families to borrow to buy a home. But the Fed’s goal is also to keep rates so low that investors will dive back into real estate in a search for yield they can’t get from savings accounts or financial investments.

Both individuals and business interests are buying up investment property, although happily they seem a bit less likely to go for the quick “flip” and cash out. But the market is still dangerously distorted by the heavy hand of government policy, and the current Administration seems to think a housing boom brings prosperity, rather than being a result of wealth creation.

It’s also worth keeping in mind that housing is not the secret sauce of economic prosperity. The anemic 0.4% GDP growth in the fourth quarter of 2012 would have been even worse without a 17.6% surge in real residential fixed investment. But even though the government calls it investment in GDP calculations, housing is substantially a form of consumption. A large home (assuming the occupant can afford it) is a manifestation of wealth, not a creator of it.

Every dollar of capital that policy makers drive into housing is a dollar that won’t be spent creating the next great innovation in software or medicine or something else. Over the long haul, the economy grows when people invest in things other than housing—specifically in technologies that enhance productivity and allow all of us to achieve higher living standards. Housing does fine when people are employed and wages are rising. In other words, sustainable growth in real-estate values is a symptom of a vibrant economy, not a cause.

It really is the 2008 bubble all over again: loose, cheap money flooding the market – and not just for low-income housing or starter homes, because Fannie and Freddie are still dishing out mortgages of $600,000 and more. This is the “cargo cult” approach to economics – build the symbols of prosperity, and prosperity will swoop down to take up residence. Are we really going to learn nothing from the last time this all happened?